Protectionism hits the outsourcing industry

Outsourcing of IT services and back-end business processes to low-cost countries like India, the Philippines and Ghana is seen as a big money-saver in corporate boardrooms in the U.S. and Europe. But laid-off workers, hit by recession, look at it differently: Offshore outsourcing is moving jobs outside their countries, and they are pushing policy-makers to put on the brakes.

Government officials in the U.S. and Europe are awakening to the plight of laid-off tech workers, and are considering proposals that would curb the growth of offshore outsourcing. Even if current proposed sanctions against offshore outsourcing do not end up being passed into law, the resulting controversy may force changes in the way outsourcing is done.

“Increasing off-shoring of tech jobs means few jobs created in the U.S., increased job insecurity, lower wages and benefits,” said Marcus Courtney, president and organizer of the Washington Alliance of Technology Workers (WashTech) in Seattle. “It always amazes me how people say outsourcing is irreversible and inevitable.”

The cries of workers threatened by offshore outsourcing have touched a chord among officials in several states, including New Jersey, Maryland, Washington, and Pennsylvania, which are considering or have already proposed legislation that would restrict offshore outsourcing for government contracts, according to the National Conference of State Legislatures, a bipartisan U.S. association that tracks legislation at the state level.

State Senator Shirley Turner, a New Jersey Democrat, proposed a bill requiring that workers on state contracts be U.S. citizens or legal aliens or have some speciality for which U.S. workers cannot be found.

“We need to focus on making sure our own people have work,” Turner said.

No U.S. state bill has yet made it through both legislative chambers and gone to a governor for signing into law, but Turner’s bill has stirred tremendous controversy and was passed unanimously by the state senate in December last year. It is now being reviewed by the government committee in the state assembly.

In France, a group called MUNCI (Mouvement pour une Union Nationale des Consultants en Informatique or Movement for a National Union of IT Consultants) in Issy-les-Moulineaux is also lobbying for restrictions on offshore outsourcing of IT work.

The group accuses the French government of favouring and even funding the offshore outsourcing of software development work. One French-Indian ministerial agreement, for example, is aimed at promoting the export of products and services from India to France and investment by French IT companies in India. The least the French government could do, according to MUNCI, is to buy locally itself.

There is also concern in the U.K. about foreign tech workers displacing locals. The Professional Contractors Group (PCG) there is concerned that a work permit scheme, run by a government agency called Work Permits (UK), is being misused both by U.K. companies and offshore companies offering services in the U.K. to bring in workers that are paid salaries far lower than those prevailing in the U.K. Although the work permit scheme was designed to meet a shortfall of people with certain IT skills in the U.K., the permits are being misused to bring in people with skills that are not in shortage, according to PCG in Uxbridge, Middlesex.

“We aren’t against the work permit scheme in principal; we recognize that it’s an international industry and when there is a skill shortage, then we need people,” said Gareth Williams, spokesman for the PCG. “But the problem is that the skills shortage of 1999 and 2000 has gone, and market conditions have completely changed, and the work permit scheme has not responded.”

Germany’s Green Card work permit program for foreign tech workers, introduced in August 2000, will expire on July 31. In the works is a new immigration law, designed to make it easier for foreigners, especially skilled people like IT experts, to live and work in the country indefinitely, according to a spokeswoman from the country’s Interior Ministry. The new immigration law, however, has still to be passed by the German parliament. Although tech companies in southern Germany, where Siemens AG and SAP AG are located, want rules for migrant tech workers to be relaxed further than the Green Card allowed, right to far-right legislators in southern Germany are worried about opening up Germany to foreigners.

India is clearly in the eye of the storm that is brewing, because of its high profile as a software services and business process outsourcing (BPO) location. Not only are U.S. and European companies outsourcing software development and BPO work to Indian companies, in some instances they have set up their own software development and BPO subsidiaries in India.

About 185 of the Fortune 500 companies have outsourced some part of their software requirement to India, according to the National Association of Software and Service Companies (NASSCOM). A large number of Indian software engineers also migrate each year to the U.S. and Europe, or are posted abroad by Indian software companies, as about 40 per cent of India’s software and services export revenue of US$9.88 billion in the year to March 31, came from services delivered at the customers’ sites.

The U.S. banking industry has saved $6 billion to $8 billion to date by outsourcing work to India in addition to gains in quality and higher productivity, according to internal research by NASSCOM.

“Outsourcing contracts from various states and the federal governments in the U.S. account for less than 1 percent of the total software and BPO exports from India,” said Kiran Karnik, president of NASSCOM in Delhi. India’s minister for communications and information technology, Arun Shourie, however, warns that legislation such as that proposed in New Jersey could be the beginning of a protectionist phase for services exports to the U.S. and Europe.

Last month, the head of the Dutch subsidiary of a Mumbai-based software company, I-flex Solutions Ltd., was arrested in London at the request of the Netherlands because the company had allegedly violated visa regulations in the Netherlands. “We may see more non-tariff barriers to services exports, because of the large unemployment in Europe and the U.S.,” Shourie said. “We have to work with the companies in the U.S. and Europe whose interest it is to outsource to India.”

Although executives at offshore companies in countries like India, Ghana and the Philippines are jittery about the opposition against offshore outsourcing in the U.S. and Europe, many say it is a temporary phenomenon.

“The economic necessity of outsourcing to other locations where one can get work done cheaper and better is likely to outlive any opposition to outsourcing to offshore locations,” said Ravindra Datar, principal analyst for IT services at Mumbai-based Gartner India Research and Advisory Services Pvt. Ltd., a wholly owned subsidiary of Gartner Inc. in Stamford, Connecticut.

“The logic is simple,” Datar said. “Would you save the jobs of X people at the cost of the possibility that this protectionism could lead to failure of the enterprise, and lead to a loss of 10X jobs?”

This optimism based on cold economic reality is bolstered by an example last week. BT Retail, one of the businesses of BT Group PLC in London, went ahead with plans to outsource BPO services to two companies in India, Progeon Ltd. in Bangalore and HCL Technologies Ltd. in Noida, near Delhi, despite protests from the London-based Communication Workers Union that jobs in the U.K. were being moved to India. One of the contractors, HCL, bagged a $160 million BPO order from BT to set up a dedicated facility in Noida, managed by BT, that will have about 1,000 people by the end of this year.

Analysts agree that though recession may make politicians and companies more sensitive to the complaints of national workers, the bottom line will win out in the end.

“There will be situations where U.S. and European firms recognize that they have to operate in a more politically sensitive fashion, and perhaps in the more protectionist and socialist countries of Europe, there might be some restrictive legislation,” said Ed Yourdon, chairman of the Cutter Consortium, an Arlington, Massachusetts, research and consultancy firm. “But I think the economy is the driving factor in all of this. No matter how sensitive a company might be, its need to reduce costs will generally force it to make whatever outsourcing decisions make sense.”

There are also matters of jurisdiction and legal precedent that might make protectionist laws unenforceable. Legislation like the New Jersey bill, for example, could violate World Trade Organization (WTO) agreements, according to Sambou Makalou, chief executive officer of Rising Data Solutions Ghana Ltd., an offshore call-centre business in Accra.

Industry insiders in developing BPO centres in countries like Ghana are inclined to take protectionist developments in stride. “As the U.S. economy takes a beating, we should be expecting more of these (developments),” said Samuel Crabbe, chief executive officer of Global Response Ghana MG Ltd., a customer contact centre and fulfilment services business in Accra. But corporations will not change business models that save them money, and their financial power has an impact on politics as well, Crabbe noted.

“It is big business that funds campaigns in America; I think legislators are sensible to know where their backing comes from,” Crabbe said.

In the wake of the Sept. 11, 2001, terrorist attacks and the invasion of Iraq, however, some labour association officials and policy-makers in the U.S. say concerns about national security and privacy trump financial arguments.

“We could for example limit companies’ ability to have personal information sent outside the U.S. that contains financial data,” WashTech’s Courtney said. A number of the countries U.S. companies outsource to, including India, do not have legislation to comply with U.S. “safe harbour” rules on data privacy. U.S. safe harbour rules were put into place to meet the requirements of European Union privacy legislation of 1995, and to facilitate transfer of data from Europe to the U.S.

“Especially now, when we’re at war, why would we want to provide people offshore with private information if we’re worried about security risks?” asks New Jersey State Senator Turner.

Even if economic reality and jurisdictional issues prevent protectionist legislation from being passed, the controversy kicked up by in-country workers’ associations and legislators taking their side, coupled with security concerns, may end up changing the way outsourcing is done.

Onshore outsourcing makes just as much sense as offshore outsourcing in many instances, after total project costs are considered, according to Basheer Janjua, chief executive officer of Integnology Corp., a product design service and engineering consulting firm in Santa Clara, California.

“Schedule slips are often caused by poor project management — frequently cited by many as a problem with overseas outsourcing, insufficient team interaction and various other issues that relate to overseas outsourcing,” Janjua said. “Re-work and quality issues alone can easily increase total project costs by as much as 20 per cent. Add delays in time to market and its direct impact on upfront revenue, and the cost equation can easily reverse in favour of local sourcing. We have witnessed this directly ourselves.”

U.S. companies can also take advantage of the lower cost of tech workers in the U.S. after the recession, according to Janjua. “We have seen time after time in many dozens of interviews over the past several months that out-of-work IT and design engineers here are now willing to work at 30, 40 or even 50 per cent less than the going rate of two to three years ago,” Janjua said.

Dire situations call for strong measures, even if they do often appear to be protectionist. “In many bid situations today, government and some companies give preference to minority-owned businesses. What about a preference also being given to companies whose outsourced technical staffing comes from the U.S., or at least a certain percentage of it?” Janjua said.

“To the extent that it’s perceived as a serious problem, Indian companies might study the tactics and strategies of Japanese automobile companies who have gradually moved into the North American and European marketplaces,” said the Cutter Consortium’s Yourdon. “For example, they might establish a marketing and sales presence with local U.S. citizens rather than Indian citizens, they might open local U.S. offices, and perhaps for political reasons rather than economic reasons, they might acquire a low-cost U.S. BPO provider, and then gradually move some of its activities back to India.”

Some Indian BPO companies are also planning to set up facilities in countries like the U.S. and the U.K. to get closer to their customers, Datar said. This is primarily to offset competition from multinational BPO companies that have set up operations in India to take advantage of the lower cost of workers in the country, Datar added.

Offshore companies are also likely to change their strategies to become more multicultural, Srikar Reddy, senior vice president of software services company, Sonata Software Ltd. in Bangalore, agreed. “As we get into high-end solutions delivery to our customers, we will be hiring locals in the U.S., because they understand local business better, give the customer a higher comfort level, and we will not draw attention to ourselves as an Indian operation,” Reddy said.

With files from Gillian Law in London, John Blau in Dusseldorf, Peter Sayer in Paris and Marc Ferranti in New York.

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